Global trend towards a fossil-free future
Energy markets around the world have varying degrees of fossil-free electricity generation. A large share of electricity generation in the Nordic countries is derived from hydro and nuclear power, while fossil fuels are still the dominant energy source globally. This balance is changing. Increasingly I am seeing that renewable energy is the most competitive alternative for investments in electricity generation, owing to decreasing costs for solar and wind power as well as to state subsidies.
The world is currently facing a number of political and economic uncertainties that could affect the energy sector and the global climate agreement in 2017. Over the long term, I am convinced that efficient, fossil-free, low-emitting technologies combined with market forces will lead us on the right path – both from economic and climate perspectives. One such advancement is electric cars and buses, which are nearing a breakthrough and have the potential to reduce CO2 emissions and create less noise in our cities. This is an area in which we made significant progress in 2016 through the establishment of InCharge, a large e- vehicle charging network, as well as in testing Sweden's first wireless electric bus charging station together with our project partners.
We are many actors who are working to achieve sustainable development. The UN Agenda 2030 lays out a joint direction for the most important challenges ahead. At Vattenfall when we look at the various sustainability goals in Agenda 2030 we see great opportunities to contribute and make a positive impact in many areas. Our core business is about producing affordable, sustainable energy in which the climate impact is always included in the calculation. We are part of the solution when it comes to innovation and infrastructure for sustainable cities and communities.
Our long-term strategic path
Fossil fuels are not a viable long-term option, neither for a world committed to solving the climate problem nor as part of the Vattenfall of tomorrow. The divestment of our lignite operations in Germany was an important milestone for us in this respect and also contributes to reducing the overall risk profile. While lignite does not fit our strategy, Germany will continue to be an important market for Vattenfall, with a large and growing customer base in electricity sales, distribution and heat, and with increasing investments in wind power.
Step-by-step we are adapting our portfolio to new market conditions and to a more sustainable energy system. This is also reflected in our capex plan, where a large share of our planned investments of SEK 50 billion in 2017 and 2018 will be made in wind power, solar energy, district heating and electricity distribution. In fact, Vattenfall is one of the largest developers of offshore wind power in the world, which is something that we should be proud of. We have recently secured a number of projects by winning tenders in a highly competitive market. High efficiency and cost optimisation will ensure the long-term profitability of these projects.
One example of efforts to achieve greater decentralisation and customer centricity can be seen in our launch of the Powerpeers website in the Netherlands, which is a platform that allows small-scale, local energy producers and consumers to exchange local renewable energy, neighbour- to-neighbour. I am excited to see the rapid development of local initiatives that promote the generation of local fossil-free energy and allow greater customer involvement and choice. The "Voices of Vattenfall" case studies that are interspersed throughout this report provide some insight to such initiatives.
Our customer commitment and adaptation to the new energy system is also evident in the large investments we are making in our electricity grids, both in Sweden and Germany. We are constantly renewing the grids to ensure that we meet the ever greater quality requirements and can support the growing proportion of renewable energy in the system.
Negative net result but improved underlying operating profit
Despite several positive developments, the business situation for electric utilities remains tough, with low prices and continued overcapacity. The entire energy sector is under price pressure, which resulted in substantial impairment losses for Vattenfall in 2016. Profit for the year totalled SEK -2.2 billion for continuing operations and SEK -26 billion for Vattenfall as a whole, including the lignite operations. In terms of our continuing operations, we are beginning to see some positive financial developments in line with our new strategic direction. In 2016, the underlying operating profit for continuing operations was SEK 21.7 billion, which is compared to 2015. Our focus on reducing costs was a key contributing factor, together with strong earnings performance by our Heat and Customers & Solutions business areas. Our greater sales focus also contributed to an increase in the customer base growth by more than 200,000 contracts in 2016.
Our CO2 Roadmap
To address climate change – which is one of the greatest challenges of our time – we have developed a CO2 Roadmap with the goal of being climate-neutral by 2050, and by 2030 in the Nordic countries. Following the divestment of our lignite operations in 2016, we will continue to phase out the use of coal in Vattenfall and will implement new smart energy solutions together with our business partners. For example, we will convert the Klingenberg lignite-fired power plant in Berlin into a gas-fired plant three years ahead of schedule, which will reduce our annual CO2 emissions by 600,000 tonnes and give us an entirely new replacement power plant in operation by 2021. I am also looking forward to our continued partnerships with the cities of Uppsala, Berlin, Hamburg and Amsterdam to help them achieve their ambitious climate goals. In this report we have also highlighted current issues like these under the heading "Topical issues".
More favourable energy policy climate in Sweden and Germany and reduced risk profile for Vattenfall
Besides the lignite divestment the Swedish energy policy agreement in June 2016 was in my view one of the most positive developments during the year. It provides greater certainty and the basis for necessary investments and long-term planning in the energy sector. I highly welcome the commitment to a renewable energy future and the acknowledgement of the importance of nuclear power to realise this in a financially responsible manner. At the same time, we must continue our cost-cutting work to ensure that our nuclear plants will remain profitable.
Another key ingredient in the Swedish energy policy agreement is the reduced tax on hydro power. Hydro power is the backbone of Sweden's renewable energy system and investments are needed here to increase flexibility.
Another positive development was the German government's decision to establish a fund to finance the dismantling of the country's nuclear reactors and properly manage nuclear waste. The fund settles the debate on who is financially responsible for the country's exit from nuclear power and allows us to determine our financial obligations in this area with much greater certainty. The decision is expected to take effect in 2017. In summary we can conclude that significant progress has been made through the lignite divestment, the Swedish energy policy agreement and the financing solution for German nuclear which all contribute to a lower risk profile for Vattenfall.
Work with human rights
In 2016 we conducted a human rights screening throughout our value chain and extended the scope of human rights due diligence among our suppliers. These activities have helped us identify areas for improvement and will enable us to strive towards a greater positive impact in all areas of our business, in accordance with our commitment to the UN Global Compact.
Creating opportunity in the new energy landscape
The recent steps we have taken will be instrumental in our success at realising our strategy, but we have a number of equally important actions ahead of us in our work on creating a new Vattenfall. We will need to continue our strong growth in renewables, improve our customers' experiences, develop decentralised electricity and heat solutions, enhance our digitalisation expertise, reduce our climate impact and increase the cost-efficiency of our core operations. Through these measures I am convinced that we will create exciting future opportunities – not just for Vattenfall, but also for our customers, our partners and society as a whole.
President and CEO